Banana warriors unite! The whole battle with the EU over Foreign Sales Corporations (FSCs) and Extraterritorial Income (ETI) is back in the news. (FSCs and ETIs were used extensively in cross-border leases of aircraft). The issue is export subsidies and the genesis of the controversy began with US import duties on bananas from former EU colonies. In retaliation for perceived abuse, the EU attacked the US FSC regime as being an illegal export subsidy scheme, bringing suit before the WTO.
The US has long had tax mechanisms to promote exports, one of which is a FSC. The benefit to the US taxpayer in a FSC is that the effective tax rate ranged from roughly 23 to 28%. In order to benefit from this break, the FSC had to meet structural, annual, transactional, and export property requirements. The property must satisfy three criteria to qualify as export property, i.e., it must be manufactured, produced, grown or extracted in the US, held primarily for sale, lease or rental for use outside the US, and no more than 50 percent of the property's value can be attributable to articles imported into the US. There were two types of FSCs – an ownership FSC and a commission FSC, both of which were used in the equipment leasing industry.
The result of the EU suit was that, in 2000, the WTO ruled that the "FSC measure", consisting of Sections 921 to 927 of the United States Internal Revenue Code and related measures establishing special tax treatment for foreign sales corporations, was inconsistent with the United States' obligations under the Agreement on Subsidies and Countervailing Measures.” In other words, get rid of the FSCs, or else face higher tariffs on your exported goods. Congress did so when it adopted a new export tax system, which was the ETI. Unfortunately, the ETI also was challenged by the EU and deemed unacceptable in 2002. The law was changed again, in the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 and the American Jobs Creation Act of 2004, but with grandfathering provisions to protect US taxpayers from undue harm.
All of which brings us to the current problem which is that the WTO has ruled that the transitional and grandfathering measures continue to fail to implement fully the WTO recommendations and rulings to withdraw the prohibited subsidies. The US now has three months to come up with an alternative or else the EU will impose higher tariffs on US grain, iron, steel, electrical machinery, textiles, fruit, and footwear exports. The rub is that any changes to our tax laws are difficult to make and subject to political ramifications, so expect to see higher prices. Yes, we have no bananas.
» TIRPA news from LeasingNotes
TIRPA contains provisions impacting the leasing industry. [Read More]
Tracked on: May 15, 2006 6:36 AM | Permalink to Trackback